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With great profit, comes greater risk

So you have been trading stocks for quite some time. You feel that you have mastered the art of trading and want to go further. You think you can play with the big boys now.

Well then, step up to the plate and get ready for some advanced stock market trading.

For advanced traders, using margin, selling short, considering IPOs, and other sophisticated trading strategies can open a new world of trading experience and potential profits.

Understanding IPOs

IPOs or initial public offerings mark the transition of a company from a privately owned firm to a public held firm. Every incorporated business issues stock, although initially, to a few stockholders. In order for a company to raise capital without incurring debt, one way is to sell stock to the public.

There are two ways to make money from IPOs.

First, is to get in early and buy stocks, hope for a quick big increase in value, and then sell for a quick profit.

The other is to watch and wait. See if a stock is fairly priced. If it’s reasonable, grab the stock.

Shorting Stocks

Selling short is an advanced technique. Short sellers look for the best stock to sell. Short sellers sell stock they don’t actually own with a belief the value will come tumbling down in the near future.

When the price drops, they can buy the stock at the lower price, pocket the profit and return the shares to the owners.

Short selling is risky though. If the prices jump instead of drop, you will lose money. There is no way to easily speculate if a stock will fall. So the potential for loss is greater than the potential for profit.

Margin Trading

Margin accounts can allow you to borrow money to buy stock. Margin trading uses borrowed money to increase how much stock you can buy. This money can be supplied by a broker.

If you were to buy a stock worth $1,000 without the use of margin trading, you would have to dish out the $1,000 dollars. But if you margin trade, your broker can lend you half of the amount or $500 and you only need to shoulder the other $500.

If the stock gets you $10 per stock, profit will be based on the number of stocks you bought with $1,000. Then you can pay the broker back. If you did not margin trade, your profit would only have been for the number of stocks you could have initially afforded for $500.

Closing

As with everything in life, there is a flip side to every coin. The greater the profit, the greater the risk. Advanced trading is not for the faint of heart.